A temporary boost for oil price: the effect of bomb cyclone

 

Oil price and the bomb cyclone
As the US braced itself for the so-called bomb cyclone before the weekend, the oil price that has been plummeting for weeks, got a sudden boost and went up.

As crude oil markets closed on Friday, WTI, Brent and LNG, liquified natural gas, stood at $79.56,$83.92 and $5.08 respectively. 

It is obvious, that the arrival of a very cold weather front - and potential destruction to lives, properties and infrastructure - made the investors and consumers nervous that in turn the boosted the price of oil.

In addition, some analysts quickly attributed the rise in price of crude oil to the relaxation of rigid Covid-19 rules adopted by China, the world's second largest consumer. What is unclear, however, is whether the measure actually stemmed from the cumulative decline in infections or a knee-jerk reaction by the authorities in response to public anger at the harsh measures taken to combat the spread of the disease.

According to the latest media reports, China is not out of the woods yet, as far as Covid-19 infections are concerned. The fact that some of its neighbours are concerned about the development, just highlights the very danger, especially when the country in question heads into the harshest phase of the winter. 

In India, the third largest consumer of oil in the world, for instance, some states are taking precautions while fearing the worst. In some states, by contrast, the mood appears to be somewhat relaxed. In Maharashtra, where the commercial capital Mumbai is, for instance, the health minister says there are fewer than 200 Covid-19 cases in his state.

In another development, the price of LNG has been falling as well despite the cold weather in the northern hemisphere - despite the latter being in winter. Some analysts believe it is because the countries in the region managed to address the supply woes of the commodity in time - against all odds.

Since the price of natural gas has been a key factor in determining the price of crude oil recently, eclipsing the effect of the US crude oil stocks, the price of LNG at current level could be a potential drag on the price of crude oil in the coming weeks.

It was unthinkable before the winter that the price of LNG would drop below $5 in the middle of winter; it, however, did happen this week.

The bomb cyclone, meanwhile, is causing enormous destruction and death in the US. Having stretched over 2000 miles, it has so far affected over 200 million Americans with over 17 deaths across the states.

In these circumstance, the ability of the people to move around in the regions affected is next to zero, which can bring the consumer demand for oil down substantially. The demand for gas, however, will shoot up as people have to warm their homes to keep the freezing conditions at bay.

A bomb cyclone, according to meteorologists, takes place due to the sudden drop of air pressure of a winter storm at its centre that ultimately results in heavy precipitation and very strong winds,  covering a vast region. 

The latest weather data, however, shows that the storm will die out much sooner than what people feared it would; it has already peaked, but it will take days for the regions affected to reach normalcy.

Bomb cyclone model

In this context, the price of crude oil will certainly come under pressure once again in the New Year, as the economic indicators are not strong enough to sustain the boost that the crude oil market got due to a winter storm. 







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